Fundamental Accounting Principles -Hardcover
Fundamental Accounting Principles -Hardcover
22nd Edition
ISBN: 9780077862275
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
Question
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Chapter 16, Problem 12E
To determine

Concept Introduction:

Cash Flow Statement:

Cash Flow Statement is the statement reflecting the flow of Cash & Cash Equivalents.

Cash:

It includes Cash in Hand & Deposits with Bank.

Cash Equivalents:

It includes those investments which are short term investment and highly liquid i.e. maturity period is of three months or less.

Operating Activities:

Operating Activities are the principal revenue generating activities of enterprise. In other words activities that are not financing and investing activities.

Investing Activities:

Investing activities are the activities related to acquisition and disposal of long term assets and investments. The investments are those investments which are not included in cash & cash equivalent.

Financing Activities:

Financing activities are the activities which results in change in size and composition of owner’s capital and borrowing of the enterprise.

Cash Flow from Operating Activities:

Cash flow from operating activities includes the inflow from principal revenue generating activities of enterprise. In other words inflow from activities that are not financing and investing activities.

Total Assets:

Total Assets includes the Non-Current Assets and Current Assets of an enterprises.

Average Total Assets:

Average total assets can be calculated by using the formula mentioned below

  (Opening Total Assets + Closing Total Assets)2

Current Assets:

Current Assets are the assets that are either in the form of Cash & Cash Equivalents or can be converted into Cash or Cash Equivalent within a short period of time i.e. 12 months.

Non-Current Assets:

Non-Current Assets are those assets which are not current assets. It includes Fixed Assets (Tangible and intangible), Long term Investments, Long term loans and advances and other non-current assets.

Cash Flow on Total Assets Ratio:

It is an efficiency ratio used to calculate the efficiency of Assets to generate cash flows.

Requirement 1:

To Calculate and Prepare:

  1. The Cash Flow from/(Used in) Operating Activities
  2. The Cash Flow from/(Used in) Investing Activities
  3. The Cash Flow from/(Used in) Financing Activities
  4. The Cash Flow Statement for the Year ended on 30th Jun 2015

Expert Solution
Check Mark

Explanation of Solution

  1. The Cash Flow from Operating Activities : $151,410
  2. The Cash Flow Used in Investing Activities : $47,600
  3. The Cash Flow Used in Financing Activities : $60,310
  4. The Cash Flow Statement for the Year ended on 30th Jun 2015: The statement is prepared below.

In the Books of IKIBAN INC. Cash Flow Statement For the year ended June 30, 2015

    Particulars

    Amount

    (In $)

    Amount

    (In $)

    I. Cash Flow from Operating Activities:

    - Cash Received from Customers (Working Note No.1)

    - Less : Cash Paid for Purchase of goods/Inventory

    (Working Note No.2)

    - Less: Cash Paid for Other Expenses

    (Working Note No.3)

    Cash Generated from Operations

    Less : Income Tax Paid (Working Note No.4 )

    Cash Flow from Operating Activities

    II. Cash Flow from Investing Activities

    - Proceeds from Sale of Equipment

    (Working Note No.5)

    - Acquisition of New Equipment

    Cash Used in Investing Activities

    III. Cash Flow from Financing Activities

    - Proceeds from Issue of Common Stock

    ($220,000-$160,000)

    - Payment for Dividend (Working Note No.6)

    - Payment for Retirement of Note Payable

    Cash used in Financing Activities

    IV. Net Increase in Cash & Cash Equivalents

    (I+II+III)

    V. Add : Cash and Cash Equivalents in the beginning of the

    year

    - Cash

    VI. Cash and Cash Equivalents at the end of the year

    - Cash

    664,000

    (393,300)

    (75,000)

    10,000

    (57,600)

    60,000

    (90,310)

    (30,000)


    195,700

    (44,290)

    151,410

    (47,600)

    (60,310)

    43,500

    44,000


    87,500

Explanations:

The working notes attached to the cash flow statement above are as under −

Working Notes:

  1. Calculation of Cash Received from Customers

Dr. Accounts Receivable A/c Cr.

    Particulars
    Amount (In $)
    Particulars
    Amount (In $)
    To Balance Brought Down

    To Sales (All sales are on credit)
    51,000

    678,000
    By Cash A/c- Cash Received from Customers During the Year
    (Balancing Figure)

    By Balance Carried Forward
    664,000

    65,000


    729,000

    729,000
  1. Calculation of Amount Paid for Purchase of Goods/Inventory

Dr. Inventory A/c Cr.

    Particulars
    Amount (In $)
    Particulars
    Amount (In $)
    To Balance Brought Down

    To Purchases A/c
    (Balancing Figure)
    86,500

    388,300
    By Cost of Goods Sold during the year − as given in Income Statement

    By Balance Carried Forward
    411,000


    63,800

    474,800

    474,800

Dr. Accounts Payable A/c Cr.

    Particulars
    Amount (In $)
    Particulars
    Amount (In $)
    To Cash A/c −Cash Paid to Purchase Goods/Inventory (Balancing Figure)

    To Balance Carried Forward
    3,93,300


    25,000
    By Balance Brought Down

    By Purchases A/c- (Total Purchases during the year)
    30,000


    388,300

    418,300

    418,300
  1. Statement showing calculation of amount paid for other Expenses
    ParticularsAmount (In $)
    Other Expenses (As per Income Statement)
    67,000
    Add: Closing Prepaid Expenses
    4,400
    Add: Opening Wages Payable
    15,000
    Less: Opening Prepaid Expenses
    (5,400)
    Less: Closing Wages Payable
    (6,000)
    Amount paid for other expenses75,000
  1. Calculation of Income Tax Paid

Dr. Income Tax Payable A/c Cr.

    Particulars
    Amount (In $)
    Particulars
    Amount (In $)
    To Cash A/c −Income Tax Paid During the Year (Balancing Figure)

    To Balance Carried Forward
    44,290


    3,400
    By Balance Brought Down

    By Provision for Income Tax − (as per Income Statement)
    3,800


    43,890

    47,690

    47,690
  1. Calculation of Proceeds from Sale of Equipment

Dr. Equipment A/c Cr.

    Particulars
    Amount (In $)
    Particulars
    Amount (In $)
    To Balance Brought Down

    To Cash A/c- New Equipment Purchased


    To Gain on Sale of Equipment −given in adjustment
    115,000


    57,600


    2,000
    By Accumulated Depreciation-Equipment A/c

    By Cash A/c- Proceeds from Sale of Equipment (Balancing Figure)

    By Balance Carried Forward
    40,600




    10,000

    124,000

    174,600

    174,600

Dr. Accumulated Depreciation-Equipment A/c Cr.

    Particulars
    Amount (In $)
    Particulars
    Amount (In $)
    To Equipment A/c- Depreciation on Sold Equipment (Balancing Figure)

    To Balance Carried Forward
    40,600


    27,000
    By Balance Brought Down

    By Depreciation for the Current Year − (as per Income Statement)
    9,000


    58,600

    67,600
    67,600
  1. Calculation of Dividend Paid during the Year

Dr. Retained Earnings A/c Cr.

    Particulars
    Amount (In $)
    Particulars
    Amount (In $)
    To Cash A/c −Dividend Paid Income Tax Paid During the Year (Balancing Figure)

    To Balance Carried Forward
    90,310


    33,300
    By Balance Brought Down

    By Net Income- Income transferred from Income Statement− (as per Income Statement)
    24,100


    99,510

    123,610
    123,610

The following are the steps involved in preparation of Cash Flow Statement by following the Direct Method

  1. Determine the Cash Flow from/(Used in) Operating Activities

Given:

Total Sales = $678,000 (As per Income Statement)
By using this Information
Receipt from Customer
Increase in Accounts Receivable= $14,000 (Current Assets) Can be calculated

Cost of Goods Sold= $411,000 (As per Income Statement) Use this Information
Decrease in Inventory= $22,700 (Current Assets) to Calculate Amount
Decrease in Accounts Payable= $5,000 (Current Assets) Paid for Inventory

Other Expenses =$67,000 (As per Income Statement) Use this Information
Decrease in Prepaid Expenses= $1,000 (Current Assets) to calculate amount
Decrease in Wages Payable= $9,000 (Current Assets) paid for expenses

Income Tax Expenses= $43,890 Use this Information
Income Tax Payable= $3,800 (Opening Balance) To Calculate Income Tax
Income Tax Payable= $3,400 (Closing Balance) Paid During the Year

    ParticularsAmount (In $)
    Receipt from Customer (Working Note No.1)
    664,000
    Less: Amount paid towards purchase of Goods (Working Note No.2)
    393,300
    Less: Cash Paid towards other Expenses (Working Note No.3)
    75,000
    Cash Generated from Operations
    195,700
    Less: Income Tax Paid (Working Note No.4)
    44,290
    Cash Flow from Operating Activities151,410

Note: As described above, the Amount received/paid can be calculated by preparing the T-Shape Account. The Rules for preparing the T-Shape Accounts is mentioned below:

    Nature of AccountDebit SideCredit Side
    Asset Account
    Increases
    Decrease
    Liabilities Account
    Decreases
    Increase
    Revenue Account
    Decreases
    Increase
    Expenses Account
    Increases
    Decrease
    Capital Account
    Decreases
    Increase
  1. In this step, Calculation of Cash Flow from/(Used in) Investing Activities:-

Given:

New Equipment purchased= $57,600
Cost of Equipment sold= $48,600
Gain on Sale of Equipment = $2,000
Now to calculate the amount received from sale of equipment, we can prepare the Equipment A/c and Accumulated Depreciation-Equipment A/c. (The Account is prepared in Working Note No.5)

    ParticularsAmount (In $)
    Cash from sale of old equipment (Working Note No.5)
    10,000
    Less :Cash Paid for purchase of New Equipment
    (57,600)
    Cash Used in Investing Activities(47,600)
  • In this step, Calculation of Cash Flow from/(Used in) Financing Activities:-
  • Given:

    Proceeds from Issue of Common Stock = $60,000 ($220,000-$160,000)
    Payment for Retirement of Note Payable = $30,000

    Calculate: Payment towards the dividend can be calculated by preparing the Retained earning account. The account is prepared in working Note No.6

      ParticularsAmount (In $)
      Proceeds from Issue of Common Stock (As per Comparative Balance Sheet)
      60,000
      Less: Payment for Retirement of Notes Payable
      (30,000)
      Less: Dividend Paid (Working Note No.6)
      (90,310)
      Cash Used in Financing activities(60,310)
    1. In this Step, Calculation of Net Decrease in Cash & Cash Equivalents
      ParticularsAmount (In $)
      Cash flow from Operating Activities (Computed in Step 1)
      151,410
      Cash used in Investing Activities (Computed in Step 2)
      (47,600)
      Cash Used in Financing activities (Computed in Step 3)
      (60,310)
      Net Increase in Cash and Cash Equivalent
      43,500
  • In this last Step, Calculation of Cash and Cash Equivalents as on Jun 30,2015
  • Given:

    Cash and Cash Equivalents on Jun 30, 2014= $44,000

      ParticularsAmount (In $)
      Net Decrease in Cash and Cash Equivalent (Computed in step 4)
      43,500
      Add: Opening Cash & Cash Equivalents
      44,000
      Cash and Cash Equivalents at the end of year i.e. Jun 30,2015
      87,500

    Current Assets: Current Assets are the assets that are either in the form of Cash & Cash Equivalents or can be converted into Cash or Cash Equivalent within a short period of time i.e. 12 months.

    Current Liabilities: Current Liabilities are the liabilities which are repayable in a short period of time i.e. 12 months.

    Conclusion

    The Cash and Cash Equivalents of IKIBAN INC as on 30th Jun 2015 is $87,500.

    Requirement 2

    To determine

    To Calculate:

    The Cash Flow to Total Asset Ratio for the year ended on Jun 30,2015.

    Solution 2:

    The Cash Flow to Total Asset Ratios for the year ended on Jun 30,2015 is 0.496 times

    The formula to calculate the Cash Flow on Total Asset Ratio is mentioned below:
      Cash flow to total assets ratio=Cash flow from operating activitiesAverage Total Assets

    Statement showing Calculation of Cash Flow to Total Asset Ratio:

      Particulars2015
      A. Cash Flow from Operating Activities
      $151,410
      B. Average Total Assets (Working Note No.1 )
      $305,300
      C. Cash Flow to Total Assets (A/B) 0.496 times

    The Cash Flow on Total Assets is 0.496 times for fiscal year 2015.

    Requirement 2

    Expert Solution
    Check Mark

    Explanation of Solution

    Working Note:

    1. Calculation of Average Total Assets
      ParticularsAmount (In $)
      A.Total Assets (as on Jun 30, 2014)
      $292,900
      B. Total Assets (as on Jun 30, 2015)
      $317,700
      C. Total (A+B)
      $610,600
      D. Average Total Assets (C/2)$305,300

    The Following are the steps involved in Calculation of Cash Flow on total Assets Ratio:

    Step1: Calculation of Cash Flow from Operating Activities

    Given
    Cash Flow from Operating Activities for Year ending on 30th Jun 2015 = $151,410

    The steps involved in Calculating Cash Flow from Operating activities are as below.

    1. Determine the Cash Flow from/(Used in) Operating Activities

    Given:

    Total Sales = $678,000 (As per Income Statement)
    By using this Information
    Receipt from Customer
    Increase in Accounts Receivable= $14,000 (Current Assets) Can be calculated

    Cost of Goods Sold= $411,000 (As per Income Statement) Use this Information
    Decrease in Inventory= $22,700 (Current Assets) to Calculate Amount
    Decrease in Accounts Payable= $5,000 (Current Assets) Paid for Inventory

    Other Expenses =$67,000 (As per Income Statement) Use this Information
    Decrease in Prepaid Expenses= $1,000 (Current Assets) to calculate amount
    Decrease in Wages Payable= $9,000 (Current Assets) paid for expenses

    Income Tax Expenses= $43,890 Use this Information
    Income Tax Payable= $3,800 (Opening Balance) To Calculate Income Tax
    Income Tax Payable= $3,400 (Closing Balance) Paid During the Year

      ParticularsAmount (In $)
      Receipt from Customer (Working Note No.1)
      664,000
      Less: Amount paid towards purchase of Goods (Working Note No.2)
      393,300
      Less: Cash Paid towards other Expenses (Working Note No.3)
      75,000
      Cash Generated from Operations
      195,700
      Less: Income Tax Paid (Working Note No.4)
      44,290
      Cash Flow from Operating Activities151,410

    Note: As described above, the Amount received/paid can be calculated by preparing the T-Shape Account. The Rules for preparing the T-Shape Accounts is mentioned below:

      Nature of AccountDebit SideCredit Side
      Asset Account
      Increases
      Decrease
      Liabilities Account
      Decreases
      Increase
      Revenue Account
      Decreases
      Increase
      Expenses Account
      Increases
      Decrease
      Capital Account
      Decreases
      Increase

    Step2: Calculation of Average Total Assets

    Given
    Total Assets for Year ending on Jun 30, 2015= $317,700
    Total Assets for Year ending on Jun 30, 2014= $292,900
    Now, The Average Total Assets for year ended on Jun 30, 2015 can be calculated as follows


      Average Total Assets =(Opening Total Assets + Closing Total Assets)2


      Average Total Assets=(317,700 + 192,900)2


      Average Total Assets=(610,600)2

    Average Total Assets=$305,300

    Step3: Calculation of Cash Flow on Total Assets Ratio

      ParticularsJun 30,2015
      A. Cash Flow from Operating Activities (As per Solution No.1)
      $151,410
      B. Average Total Assets (Step2)
      $305,300
      C. Cash Flow to Total Assets (A/B)0.496 times
    Conclusion

    The Cash Flow to Total Asset Ratios for the year ended on Jun 30, 2015 is 0.496 times. The Company is efficiently using its assets to generate cash flows.

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    Chapter 16 Solutions

    Fundamental Accounting Principles -Hardcover

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